Beyond Kyoto: An Economic Perspective on Climate Change Policy

1. Beyond Kyoto:An Economic Perspective on Climate Change Policy Robert N. Stavins Albert Pratt Professor of Business and Government John F. Kennedy School of Government, Harvard University Director, Harvard Environmental Economics Program Director, Harvard Project on Climate Agreements Institute of International and European Affairs Dublin, September 16, 2011

2. “What business are you in?” “I’m an environmental economist.”

3. “Environmental economics” is not oxymoronic. • The causes of environmental problems (in a market economy) are economic. • The consequences of environmental problems have important economic dimensions. • Therefore, an economic perspective is essential for • Understanding environmental problems • And therefore can be exceptionally helpful for the design of solutions that will be effective, economically sensible, and politically pragmatic.

4. Basic Economics and Geopolitics of Climate Change • Climate change is a global commons problem • Any jurisdiction taking action – a country, province, or city – incurs the costs of its actions • But the benefits (averted climate change) are distributed globally • Hence, for virtually any jurisdiction, the benefits it reaps from its actions will be less than the costs it incurs …. • despite the fact that the global benefits may be greater – possibly much greater – than the global costs • This presents a classic free-rider problem, …. • which is why international, if not global, cooperation is essential, • and this is why the highest levels of effective government should be involved, i.e., sovereign states (nations) ….

5. The National Context • Most economists & other policy analysts favor carbon-pricing. Why? • No other feasible approach can provide truly meaningful emissions reductions (such as U.S. target of 80% cut in national CO2 emissions by 2050) • It’s the least costly approach in short term (heterogeneous abatement costs) • It’s the least costly approach in the long term (incentive for carbon-friendly technological change) • So, it’s a necessary (but not sufficient) component of sensible climate policy • But, carbon-pricing is a hot-button political issue, particularly in U.S. • It makes the costs transparent (unlike conventional policy instruments); and cap-and-trade is easily associated with the T-word; indeed, in Washington, cap-and-trade was demonized as “cap-and-tax” • A meaningful, national, economy-wide carbon-pricing policy is unlikely to be enacted in U.S. before 2013 (at the very earliest) • Does that mean there will be no U.S. climate policy? No.

6. Other Important Climate Policy Developments • Carbon Tax – will fiscal realities lead to look at Federal “consumption taxes?” • Stimulus Package – $80 billion previously committed for renewables and energy-efficiency (but delays and Federal budget have intervened) • Automobile and Appliance Energy Efficiency Standards • Energy Policies (variety of standards & subsidies, not targeted at CO2) • National renewable electricity standard • Clean Energy Standard • Technology Policies • Carbon-pricing necessary, but not sufficient – information is a public good • Technology innovation subsidies necessary, but not sufficient

7. Other Federal Regulations in Place or On the Way • U.S. Supreme Court decision, EPA endangerment finding, & CAA • Mobile source standards • Stationary sources (January 2, 2011, with or without “tailoring rule”) • Air pollution policies for correlated pollutants under CAA • Rules in the regulatory pipeline – SOx, NOx, Hg, PM, coal ash, & cooling water • Could shut some coal plants (w/o any CO2 requirements)

8. Other Legal Mechanisms • Public Nuisance Litigation • Lawsuits pursuing injunctive relief and/or damages • In flux – recent court decisions, and Supreme Court • Other Interventions • Intended to block permits for new fossil energy investments • Power plants • Transmission lines • Some NIMBY, some strategic • But the international dimensions of climate change policy are key to action …

9. The International Domain:Placing Climate Negotiations in Perspective • Cliché about American baseball season applies to international climate change policy: it’s a marathon, not a sprint • Scientifically: stock, not flow environmental problem • Economically: cost-effective path is gradual ramp-up in target severity (to avoid unnecessary capital-stock obsolescence) • Economically: technological change is key, hence long-term price signals • Administratively: creation of durable international institutions is essential • International climate negotiations will be an ongoing process – much like trade talks – not a single task with a clear end-point • So, sensible goal for climate negotiations is progress on sound foundation for meaningful long-term action, not necessarily an immediate “solution”

10. What happened at COP-16 in Cancún (December 2010)? • Organizational success, and consensus achieved (both contrast w/Copenhagen) • Five key elements of the (32-page) Cancún Agreements • Includes emission targets/actions for 80+ countries – most as submitted for Copenhagen Accord – including all major economies – blurring of Annex I/non-Annex I distinction • Establishes mechanisms for monitoring & verification (analysis of developing-country mitigation actions; all report to independent panel of experts) • Establishes “Green Climate Fund” to finance adaptation & mitigation, with World Bank as interim trustee, and creates oversight board ($100 billion/year by 2020 will depend upon decisions by wealthy countries) • Advances initiatives on tropical forest protection (REDD+), including through market mechanisms • Establishes structure to assess needs & policies for technology transfer • Was this a success?

11. How I defined success for COP-16 prior to Cancún • Embraceparallel processes – MEF, G20, C30 – as input to UNFCCC process • Consolidate 3 tracks – KP, LCA, & Copenhagen Accord – to 2 tracks • Make the Copenhagen Accord the core of long-term climate agreement (LCA) talks • Focus on productive steps within specific narrow agreements, such as REDD • Develop sensible expectations and effective plans • All of this happened in Cancún • COP-16 was a success: a modest, but meaningful step forward

12. Why did Cancún succeed? • Mexican government – through careful and methodical planning – was well prepared, and was very skillful in presiding over talks • In Copenhagen, Danish Prime Minister Lars Løkke Rasmussen allowed objections of five unimportant countries (Bolivia, Cuba, Nicaragua, Sudan, and Venezuela) to derail the talks • In Cancún, Mexican Minister of Foreign Affairs Patricia Espinosa took note of same objections, ruled that “consensus does not mean unanimity,” and the Cancun Agreements were adopted • China and U.S. set a tone of civility for conference • Pressure: many countries worried that a failure in Cancún would cause demise of the UN process itself • Under pragmatic leadership of UNFCCC Executive Secretary Christiana Figueres, realism eclipsed idealism in international negotiations: • Incremental steps in right direction are better than acrimonious debates over unachievable targets

13. The Path Ahead: COP-17, Durban, South Africa(December 2011) • Define institutions and rules in Cancún Agreements (back-tracking in Bangkok) • But, in addition to LCA (Cancún) track, Kyoto Protocol (KP) track remains • Decision on a second commitment period (post-2012) for KP punted to Durban • Keeping Kyoto Protocol going is very important to developing countries • But can there be a second commitment period for Kyoto Protocol? • U.S. not a participant; Japan, Russia, and Canada will not take up targets • Australia also unlikely to participate • Is Europe-on-its-own credible or feasible? • Durban may well be dominated by debates on this highly contentious issue • So, despite the weather, Durban may resemble Copenhagen more than Cancún

14. For More Information Harvard Project on Climate Agreements www.belfercenter.org/climate Harvard Environmental Economics Program www.hks.harvard.edu/m-rcbg/heep/ www.stavins.com